Risks’ cross-contagion between shadow banks based on complex network theory: evidence from China

Abstract

Purpose The purpose of this paper is to analyze the network path and internal mechanism of risks’ cross-contagion between shadow banks and design strategies for preventing risk infection between shadow banks. Design/methodology/approach Using the complex network theory, analyze the mechanism of risks’ cross-contagion between shadow banks from the credit network, business relationship network (BRN) and social network (SN); the cross-contagion mechanism using the structural equation model on the basis of China’s shadow banks is tested; based on the three risk infection paths, the prevention and control strategies for risk infection using the mathematical models of epidemic diseases are designed. Findings There are three network risk contagion paths between shadow banks. One, the credit network, risks are infected crossly mainly through debt and equity relationships; two, the BRN, risks are infected crossly mainly through business network and macro policy transmission; three, investor SN, risks are infected crossly mainly through individual SN and fractal relationships. The following three strategies for preventing risk’s cross-contagion between shadow banks: one, the in advance preventing strategy is more effective than the ex post control strategy; two, increasing the risk management coefficient; three, reducing the number of risk-infected submarkets. Originality/value The research of this study, especially the strategies for preventing the risks’ cross-contagion, could provide theoretical and practical guidance for regulatory authorities in formulating risk supervision measures.